The main objective of this paper was to study the performance, emissions and combustion characteristics of a diesel engine using the micro-emulsions consisting of rapeseed oil/diesel blend, ethanol and a surfactant. The main fuel properties were investigated and compared with that of diesel. The experimental results show that the viscosity and density of the micro-emulsions was decreased and approached that of diesel with the ethanol addition up to 30% by volume. The start of combustion of the micro-emulsion was later than that of diesel and the peak cylinder pressure, peak pressure rise rate and peak heat release rate were higher than those of diesel. The corresponding crank angles were retarded with the increase of ethanol addition. The combustion durations of the micro-emulsions were slightly shorter at low engine loads, and almost similar to that of diesel at high engine loads. For the micro-emulsions, there were slightly higher brake specific fuel consumptions (BSFCs), while almost identical brake specific energy consumptions (BSECs). Drastic reduction in smoke was observed with the micro-emulsions at high engine loads. Nitrogen oxides (NOx) emissions were found slightly lower at low engine loads for the micro-emulsions.